If you’re a retail tenant or landlord in Australia, you’ve likely heard of IFRS 16 — the international accounting standard that fundamentally changed how leases are reported on financial statements. But what does an accounting standard have to do with your next lease negotiation at a shopping centre? More than you might think.
What Changed Under IFRS 16?
Before IFRS 16 came into effect, operating leases — the type most retail tenants in Australian shopping centres hold — were kept off the balance sheet entirely. Rent was simply an expense in the profit and loss statement. The lease itself didn’t show up as an asset or a liability.
IFRS 16 changed all of that. Under the current standard, tenants are required to recognise nearly all leases on their balance sheet. This means recording a right-of-use (ROU) asset and a corresponding lease liability that reflects the present value of future lease payments. For retailers with multiple store locations, this can significantly alter key financial metrics like debt-to-equity ratios and return on assets.
Why This Matters for Retail Lease Negotiations
The balance sheet impact of IFRS 16 has shifted the way both tenants and landlords approach negotiations.
Shorter lease terms are more attractive to tenants. Because the lease liability is calculated based on the total future payments over the lease term, a longer lease creates a larger liability. Many retail tenants now prefer shorter initial terms with renewal options rather than committing to lengthy agreements upfront. This is especially relevant in Australian shopping centres where five to seven year terms have traditionally been the norm.
Renewal options require careful consideration. Under IFRS 16, tenants must assess whether they are “reasonably certain” to exercise a renewal option. If they are, those additional payments must be included in the lease liability calculation from day one. This means the decision to include or exclude an option period isn’t just a commercial one — it directly affects the balance sheet.
Incentives and fitout contributions have accounting implications. Landlord incentives — common in Australian retail leasing — reduce the initial ROU asset value rather than being treated as simple income. Tenants need to understand how these contributions flow through to their financial statements when negotiating fitout deals.
Variable lease payments can offer flexibility. Turnover rent clauses, where a portion of rent is tied to sales performance, are generally excluded from the lease liability calculation under IFRS 16 because they depend on future activity rather than a fixed index or rate. This makes turnover-based rent structures more appealing from an accounting perspective, potentially influencing how tenants structure their rental arrangements.
What Landlords Should Know
If you’re a shopping centre landlord, understanding how IFRS 16 affects your tenants’ financial reporting can give you a strategic advantage. Tenants with significant lease portfolios are increasingly conscious of how lease terms will be reflected on their balance sheet. Offering flexible structures — such as break clauses, shorter initial terms, or turnover rent components — can make your centre more attractive to national and international retailers.
At the same time, landlords should be aware that tenants’ requests for shorter lease terms aren’t necessarily a lack of commitment. They may simply be managing the accounting impact of their lease portfolio.
Using Data to Navigate IFRS 16 Considerations
Having access to comprehensive leasing data is essential when negotiating in this environment. Understanding what lease terms, escalation structures, and incentive arrangements are standard across similar shopping centres helps both parties arrive at terms that are commercially sound and financially efficient.
LeaseInfo’s database of over 90,000 regulated retail leases provides the benchmarking data that tenants and landlords need to make informed decisions. By analysing trends in lease terms, escalation rates, and expiry profiles across Australian retail centres, you can approach your next negotiation with confidence — understanding not just the commercial terms, but their financial reporting implications as well.
Book a demo here to see how Leaseinfo can support your next decision.